Supporters make argument for public contribution to Monterey Peninsula water supply project

After two weeks of hearings, Peninsula officials believe they have succeeded in making their case that California American Water should accept a contribution of public funds capable of saving area ratepayers as much as $124 million on the proposed water supply project.

In state Public Utilities Commission hearings on the project earlier this week, Monterey Peninsula Water Management District General Manager Dave Stoldt was quizzed about the potential implications of a proposed public contribution of up to $100 million, which water district officials and Peninsula mayors say would lower the overall interest rate on the $400 million water project.

The mayors, led by Carmel's Jason Burnett, have made the contribution a prerequisite for offering their support for the project, which includes a desalination plant north of Marina along with supplemental aquifer storage and recovery and groundwater replenishment sources. The project is designed to provide a new water supply for the Peninsula, which is facing a state-ordered cutback in pumping from the Carmel River that takes full effect at the start of 2017.

Cal Am officials have expressed concerns about the public contribution proposal, saying if the project is funded with too much debt measured against their equity it may affect their credit worthiness, possibly leading to higher interest rates on future borrowing. The company's financial experts have also indicated concern that the contribution could be treated as recourse debt, result in additional costs and delays associated with securitization — selling bonds to recover the debt — and include tax consequences.

But Stoldt said Friday he believes local officials were able to answer all those concerns during cross-examination by the company's own experts.

"The witnesses for the public agencies demonstrated strong knowledge and refuted all of the company's claims, clearing the way for the commission, should it choose to do so, to direct the parties to advance the concept of a public contribution further," he said. "It would reduce the annual cost to ratepayers."

Burnett agreed with Stoldt's assessment. He said the case made by local officials benefitted from a ruling by PUC Administrative Law Judge Gary Weatherford that allowed Ross McGlothlin, attorney for the mayors' water authority, to cross-examine water management district expert witness Rob Larkin regarding the public contribution.

He said Larkin made the point in his testimony that the proposed structure for the public contribution has been used many times before — for an estimated $40 billion in transactions, including several approved by the PUC — and typically results in at least a AA credit rating.

Both Stoldt and Larkin have recommended the commission order Cal Am explore a securitization package for the public contribution as long as it's completed within six months of permanent financing for the project.

Cal Am spokeswoman Catherine Bowie said the company's lawyer objected to the cross-examination because Larkin was being paid by both the water authority and the water district, and parties are not allowed to question their own witnesses.

But Burnett said Cal Am regularly sought to exclude evidence presented by the authority and the district during last week's hearings.

Bowie said company officials still have concerns about the public contribution proposal, but they remain "committed to work with (the authority and the district) to see if there's a way those concerns can be allayed."

She added that Cal Am, like the public entities, are "interested in finding the lowest-cost financing structure for our customers. We appreciate all of the hard work that has gone into developing the public contribution proposal by our local representatives. It is important for the judge to have a complete picture of the issues before he makes a decision. In order to protect our customers, the judge must see both sides of every issue — that was the intent of our testimony. The hearings are an opportunity for the parties to express their positions and add to the debate."

Keith Israel, general manager of the Monterey Regional Water Pollution Control Agency, said Cal Am, as a private company, is "in business to make money, and everyone's working together on this, but when it comes down to finances, Cal Am wants to do the best it can for its shareholders.

"I think the community hung in there."

In other project financing-related testimony, Cal Am director of engineering Rich Svindland explained that the state is unwilling to provide written documentation that the company qualifies for low-interest state loan financing for the project — separate from the public contribution — until environmental review is complete. But he said a financing package is complete and has been submitted to the state. The mayors have said Cal Am must submit written proof that it can qualify for the state financing before they offer their support for the project.

The evidentiary hearings are set to resume April 30 and May 1, with Burnett leading a contingent of water authority witnesses to the stand on the first day. Witnesses from the PUC's Division of Ratepayer Advocates are also scheduled to take the stand, and their testimony will conclude the hearings.